What Does Lapse Mean in Life Insurance?
When a life insurance policy “lapses,” it means that the policyholder or designated payor has not paid one or more required premium payments. Premium payments are required to keep a life insurance policy in force.
Policies may require a monthly, semi-annual, or annual premium payment. Most, but not all, states require notices with specific information (designated via state statute) to be sent to the designated payor of the policy when a premium has been missed and a policy is in danger of lapsing. Failure to fulfill these payments can lead to termination of the policy entirely.
When a life insurance policy “lapses,” it means that the policyholder or designated payor has not paid one or more required premium payments. Premium payments are required to keep a life insurance policy in force. Policies may require a monthly, semi-annual, or annual payment of a premium. Most, but not all, states require notices with specific information (designated via state statute) to be sent to the designated payor of the policy when a premium has been missed and a policy is in danger of lapsing. Failure to fulfill these payments can lead to termination of the policy entirely.
How Long Do You Have to Reinstate a Lapsed Policy?
Insurance companies typically have a “grace period” for making late payments, usually around a month from the due date. If you fail to pay on time, you can make up your payment (and remain covered during this period). Be sure to check with your insurance provider so you know the length of your policy’s “grace period.”
What Happens If Your Life Insurance Lapses?
If your policy lapses, there can also be an option to apply for reinstatement of the policy. When one applies for reinstatement, however, the insurance company can review your most recent medical records to reconsider whether they would agree to insure you.
If your application for reinstatement is accepted, this also resets your two-year contestability period. Thus, if the insured dies within two (2) years of the effective date of the reinstated policy, the insurance company may contest or deny payment of the death benefit based on any misrepresentation on the reinstatement application.
What Happens If I Die Within the Grace Period?
Since life insurance policy proceeds are assets many families rely on after a loved one has passed, there are laws mandating a grace period when a lapse occurs. Once a premium payment is missed, the grace period begins. Therefore, if the insured dies within the grace period (usually 30 days), the insurer may still be required to pay the death benefit.
The grace period also allows time for someone who missed a payment for financial, health, or other reasons to catch up and make the payment before the policy lapses. Once the grace period is over, however, the policy is considered lapsed, and the insurance company will deny payment of the death benefit.
Can You Get Money Back from a Lapsed Life Insurance Policy?
Perhaps – it depends on your form of coverage. Simply put, there are limited conditions when you can get money back from a lapsed life insurance policy.
Term Life Insurance
If you have term life insurance, your options are limited. The policy will lapse, and future payments will not restart coverage. If you would like to “reinstate” your policy, you must contact your insurance provider. Generally, companies require you to fill out another application and let them know if your health has changed. Additionally, your insurance company may require a new medical exam before reinstating your policy, depending on how long it has been since the “grace period” ended.
Upon reinstating your policy, you will have to retroactively pay the premiums for the time your coverage was lapsed. This means that the longer you wait after your coverage lapses, the more premiums you will have to pay before you reinstate your previous policy.
Permanent Life Insurance
Permanent life insurance is more expensive than term life insurance, but it is also more forgiving of nonpayment. As with term life insurance, one option is to “reinstate” your previous policy by reapplying and retroactively paying the premiums you missed. If you cannot pay the required amount for reinstatement, however, there are other choices available.
Many permanent life insurance policies combine a “death benefit” (i.e. how much the beneficiary gets paid if/when the owner dies), as well as a “cash value.” This cash value functions as a savings investment separate from the death benefit. In this case, you may have the option to “cash out” your life insurance by withdrawing the policy’s cash value (i.e. its accumulated savings) when your death benefit coverage lapses.
Lapsed Policy Refund
Some insurance policies include a nonforfeiture clause, which means that if you stop paying premiums, you still receive some sort of benefit. You can think of this as a lapsed policy refund. If your coverage lapses, the insurance company will refund part of your premium payments and/or pay you the policy’s cash value. With some policies, your coverage will not lapse in case of nonpayment; instead, your policy will remain in place but with a reduced death benefit calculated as a percentage of your paid premiums.
If Your Claim Has Been Denied Due to Lapse or Termination, You Need an Attorney to Fight for You
If you never received notice of the lapse, or received inadequate notice under the law, in certain circumstances we can get the beneficiary paid the death benefits. For example, where the insured fell into a comatose state and the family never received notice that premiums were past due, only notice of lapse and termination, we were able to get the beneficiary paid.
If you have a lapsed life insurance policy and are unsure of your options, the best thing to do is contact your insurance agent and ask for details regarding your policy’s grace period, whether your lapsed life insurance policy can be reinstated, and whether there are applicable nonforfeiture provisions.
If you are the beneficiary of a lapsed life insurance policy, you also want copies of any notices sent to the insured. It is best to get in contact with an experienced life insurance lawyer to evaluate whether your claim can be paid.
